Firm-level uncertainty and corporate events

Abstract

This thesis aims to investigate the real effect of firm-level uncertainty on the outcomes of major corporate events, namely, corporate acquisitions and equity issuance. Uncertainty has long been an important topic in empirical finance, yet the majority of the research has focused on the effect of aggregated level of uncertainty, in other words, the market or at least the industry level. Few studies have considered how firm-level uncertainty affects corporate decisions regarding significant corporate events and the subsequent outcomes. Even fewer studies have examined the uncertainty inherent in tax variables. Using a sample over an extended period (1985-2017), this thesis investigates how firm-level uncertainty exerts real effects on corporate decisions as well as the associated impact on shareholder wealth.

Overall, this thesis finds that the acquirer’s pre-announcement cash flow uncertainty and tax expense uncertainty are both related to a lower probability of initiating an acquisition, greater short-run abnormal financial return around the announcement, and elevated long-run post-acquisition operating performance. In addition, the secondary equity issuer’s pre-issuance valuation uncertainty is negatively associated with the issuer’s short-run abnormal gain and long-run post-issuance stock and operating performance.

The findings suggest that in the context of mergers and acquisitions, the precautionary motive triggered by firm-level uncertainty is crucial in determining the acquirer’s takeover activity and subsequent performance. In terms of equity issuance, adverse selection is the main underlying determinant of seasoned equity offering under-pricing. Furthermore, the issuer’s overpricing resolution of the new issues puzzle is supported.